Berndale Securities Ltd v How Trading Pty Ltd - [2010] VSC 216

IN THE SUPREME COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

No. 2023 of 2008

BERNDALE SECURITIES LIMITED (ABN 63 006 687 467)	Plaintiff
and
HOW TRADING PTY LIMITED (ABN 36 101 185 979) and DAVID RICHARD CHARLES WATERHOUSE	Defendants
AND BETWEEN:
HOW TRADING PTY LIMITED (ABN 36 101 185 979)	Plaintiff by Counterclaim
and
BERNDALE SECURITIES LIMITED (ABN 63 006 687 467)	Defendant by Counterclaim

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JUDGE:	JUDD J
WHERE HELD:	Melbourne
DATES OF HEARING:	9-11, 15-18, 22-24, 29, 30 June, 1, 2 July and 5 August 2009; 25 February, 1, 30, 31 March and 7 April 2010.
DATE OF JUDGMENT:	26 May 2010
CASE MAY BE CITED AS:	Berndale Securities Ltd v How Trading Pty Ltd and Anor
MEDIUM NEUTRAL CITATION:	[2010] VSC 216

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CONTRACT – Options trading – Default by client – Default powers – Liquidation of portfolio – Duty owed by broker to client – Duty of good faith – Duty to have regard to the interests of the client – Duty to act honestly and reasonably – Breach of duty when exercising default power – Limitations on liability of client to indemnify broker.

CORPORATIONS – Misleading or deceptive conduct – oral representations by a broker to its client – conduct by silence – Australian Securities and Investment Commission Act 2000 (Commonwealth) s 12DA.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P Anastassiou SC with Mr H Redd	Blake Dawson
For the Defendants	Mr D Grieve QC with Mr A G Melick SC, Mr R Gordon and Ms D Coulton	Nedovic & Co

TABLE OF CONTENTS

INTRODUCTION AND SUMMARY

OPTIONS TRADING

Types of options
Pricing option premiums
Option taker vs option writer – Risk
ACH
Margin
Brokers, market participants and clearing participants
Market makers
Financial modelling – The “Greeks”
Trading

CHAPTER 1

CHRONOLOGY

FUNDING BUY BACKS

BUYING PROTECTION

REPRESENTATION BY SILENCE

CHAPTER 2

INTRODUCTION

LIQUIDATION CHRONOLOGY

BERNDALE’S DUTIES

Contract
Fiduciary Duty

COMPETING STRATEGIES

The Portfolio
Value

BREACH BY BERNDALE

CONSEQUENCE

AGREEMENT TO INDEMNIFY MRS WATERHOUSE

HIS HONOUR:

INTRODUCTION AND SUMMARY

Berndale Securities Ltd (“Berndale”) is a member of the Merrill Lynch group of companies. It commenced this proceeding to recover from the defendants, How Trading Pty Ltd (“How Trading”) and David Charles Waterhouse, the balance of an account recording the indebtedness of How Trading to Berndale under a Derivatives Client Agreement dated 24 May 2006. The indebtedness arose in part as a consequence of options trading undertaken by How Trading, and in part as a consequence of action taken by Berndale when unwinding or liquidating the portfolio following default by How Trading. Mr Waterhouse controlled How Trading and guaranteed its obligations to Berndale.

Berndale was not How Trading’s broker for the purpose of placing orders or giving advice. How Trading bought and sold options through Norris Smith Stockbroking Pty Ltd. In order to trade in options it was necessary for a clearing participant, authorised by Australian Clearing House Pty Ltd (the “ACH”), to assume liability as principal to the ACH on…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2010] VSC 216
Decision Date: 26 May 2010

CaseChat Overview and Summary

The matter before the court involved a dispute between Berndale Securities Ltd, a broker, and How Trading Pty Ltd, a client. The dispute centred on the broker's exercise of its default powers, which included the liquidation of the client's portfolio, and the subsequent claim for an indemnity by the broker. The case was heard in the Federal Court of Australia. The primary legal issue before the court was whether the broker had breached its duty of good faith and its obligation to act honestly and reasonably when exercising its default powers, specifically in liquidating the client's portfolio. Additionally, the court considered whether the broker's conduct amounted to misleading or deceptive conduct under section 12DA of the Australian Securities and Investment Commission Act 2000 (Commonwealth).

The court found that the broker had indeed breached its duty of good faith and had not acted honestly and reasonably. The broker had not adequately considered the client's interests and had acted in a manner that was detrimental to the client. Furthermore, the court determined that the broker's silence and oral representations to the client constituted misleading or deceptive conduct under the statute. The court held that the broker's conduct fell short of the standard expected in the relationship between a broker and its client, which demands honesty, reasonableness, and a duty of care towards the client's interests. The broker's limitations on liability to indemnify it for its actions were also scrutinized, with the court finding that these limitations were not enforceable in light of the broker's breach of duty.

Consequently, the court ruled against the broker's claim for indemnity from the client and held that the broker's limitations on liability were unenforceable. The court emphasised the importance of brokers acting with honesty and reasonableness in their dealings with clients, particularly when exercising their default powers. The judgment underscored the need for brokers to have regard to their clients' interests and to act in a manner that is consistent with the duty of good faith. The court's decision highlighted the significance of maintaining ethical standards and transparency in the relationship between brokers and their clients.

Orders